Foxy Food Company is considering a new salsa whose data are shown below. The equ

Question

Foxy Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other Foxy products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) -$5,000 Investment cost (depreciable basis) $80,000 Straight-line deprec. rate 33.333% Sales revenues, each year for 3 years $67,500 Annual operating costs (excl. deprec.) $25,000 Tax rate 35.0% a. $2,636 b. $3,828 c. $4,119 d. $4,220 e. $3,995

Explanation / Answer

Answer is 3828

Annual Revenue Less 5000 62500 Less Depreciation 26667 Annual Operating Cost 25000 Income Before tax 10833 Less Tax 35% 3792 PAT 7042 ADD Depreciation 26667 Cash Flow 33708 PV of Cash Flow 33708*2.4868 PV factor 10% 83828 NPV =80000-83238 3828

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